The Hindu Business Line : `Global debate on convergence of standards is hotting up'

The ICAI would have to soon get out of its mindset of changing and tinkering with international standards to have an `international minus' version for India.

MR RAHUL ROY, Director, Ernst & Young India Pvt Ltd.

Mr Rahul Roy, Director, Ernst & Young India Pvt Ltd, is the youngest person to have headed the Institute of Chartered Accountants of India. He has served on a number of international bodies, which include the ethics committee of the International Federation of Accountants (IFAC) , an advisory committee of the International Accounting Standards Board (IASB), and committees constituted by the Government of India, SEBI, RBI, etc. He specialises in international and Indian financial reporting and assurance. Mr Roy answers two questions from Business Line, on the year gone by, and on what lies ahead?

On the global and national trends in the accounting/auditing sector in 2006.

The following snapshots come to my mind:

The relentless march of IFRS (International Financial Reporting Standards) across the face of the globe. EU, Australia, New Zealand, all gave in to IFRS. The Chinese announced adoption of IFRS-based accounting from 2007 — the US remains the only major country that has not opened the door to IFRS. However, there is great hope that by 2009, under the "Convergence Project", the US would also allow foreign issuers to report on the basis of IFRS without a US GAAP reconciliation requirement. India, in the later part of 2006, announced the constitution of its own study team to examine convergence of Indian standards to IFRS.

Global debate on convergence of auditing standards has also begun hotting up, but on the issue of common legal standards and enforcement actions, there has been a lot of talk but little action. The regulators in 2006 continued with their piecemeal efforts of legislating country-specific standards which are very different, often with extraterritorial enforcement aspirations or consequences. The much-debated French independence rules are a classic example of this type of global overlap and confusion in seeking to regulate the audit profession.

In India, 2006 has been a year of consolidation and preparing for a great leap forward. On the consolidation side, we have witnessed re-issuance of Guidance Notes on familiar subjects such as bank audits, CARO, IPO reporting and corporate governance. I feel the most significant preparation for the great leap forward is issuance of the exposure drafts on AS-30 and AS-31 relating to presentation, measurement and recognition of financial instrument. Once these drafts become standards, the very face of corporate balance sheets would change.

The foundation for tomorrow has also been laid by the CA Amendment Act adopted by Parliament in 2006.

On what to visualise in 2007 and beyond.

To begin with, in the Indian context I see the existing position of too many laws and laxity in compliance, enforcement and retribution. As a natural consequence of evolution, I am confident that the various regulators in 2007 and beyond will strengthen the compliance, enforcement and sanctions mechanism. The evidence of this was seen in 2006, with some preliminary actions by the Ministry of Company Affairs, activism by the FRRB (Financial Report Review Board) set up by the Institute of Chartered Accountants of India (ICAI), and increased vigilance by SEBI which set up a committee to monitor the quality of financial reporting and qualifications being made in the auditors' report.

I see this trend being reinforced in the near future. However, one only hopes there is accent on the mala-fide defaults and on defaults that defraud the public, rather than a host of unintended technical defaults. Such processes of enforcement have to necessarily be accompanied with an education and information blitz for investors, users, preparators and auditors of financial statements.

During 2007, perhaps during this very month of January, dormant sections of the CA Amendment Act will be notified, moving the disciplinary power and processes away from the ICAI to an independent disciplinary mechanism. This is uncharted territory and the country will be waiting to see how successful this new disciplinary mechanism is and how transparent and quick the processes are.

The nascent peer review system will also be taken away from the jurisdiction of ICAI to the to-be-formed Quality Review Board (QRB). The peer review system in India is not comparable in extent, depth, coverage or maturity with the system in most other developed countries. The working of the QRB would also be looked at with great interest by the foreign investing community that would seek increased levels of assurance in an economy into which they are increasingly investing. In the absence of such visible assurance on the quality process of assurance providers, the investing community have been known to attach a "risk premium" to their investments that inhibits good companies from unlocking their true worth.

Mindset change required

The ICAI would also have to very soon get out of its mindset of changing and tinkering with international standards to have an `international minus' version for India. One of the most glaring examples is the Exposure Draft SQC 1 on Quality Control published by the ICAI. While the international version requires pervasive application of this Quality Standard, the Indian version restricts application assignment-wise only to certain clients of an audit firm.

It is inconceivable how the ICAI can envisage that only certain assignments within an audit firm will be handled with certain levels of Quality and Quality Standards will not be applicable to other assignments handled by the same firm. A Quality Standard should be all-pervasive. The international version has specified certain roles in the quality control process to "suitably qualified external persons" and has by definition said such a person must be a member of a professional auditing or quality control services body. The ICAI insists that such person must be a member of ICAI. In a globalised scenario this sort of tinkering would hinder our progress.

The amendment of the CA Act has removed undercutting as a disciplinary misconduct. It will be interesting to see in 2007 what effect this has on the practice of auditing, particularly in sectors where auditing/certification requirements are more compliance driven rather than value additive or assurance seeking.

The CA Amendment Act has enabled the Institute to notify non-chartered individuals with whom a chartered accountant can partner/share profits. It will be interesting to see in the year to come the categories thus notified and whether that enables growth of multi-disciplinary practices in India as had been the case in the past decade with many developed countries.

The LLP Bill, which is on the anvil, is likely to bring far-reaching structural changes in the professional practice not only in the accounting and auditor sector but for various other professionals.

Needed, prospective info

Globally, there is increasing clamour for more reporting on prospective information rather than historical information. This includes investors and other stakeholders seeking reports about an assurance on various non-financial parameters that are determinants or indicators of the potential worth of an enterprise. Very often these could be intangibles, such as quality of human resources, retention rate of critical resources, patents in pipeline, etc.

There is also a strong demand for enabling investors access to information on a real-time basis and to dice/slice that information in whichever way they want, including to be enabled to ask "what if" questions to this information at a sub-line item level. XBRL (Extensible Business Reporting Language) is fast emerging as an enabler for making such information available to users. This is the financial equivalent for the language of the Internet — "HTML".

Countries such as China, Spain, the Netherlands and the UK require companies to use XBRL and US Banking authorities require US banks to present their financial reports in XBRL. The Securities and Exchange Board of India is also examining this proposition. I am confident that sooner rather than later, companies round the globe, including in India, will be required to report in such format and the roles of the auditors will significantly change from being assurance providers on historical financial statements, to assurance providers on controls and processes that enterprise use to classify, tabulate and present data on a real-time basis.

All these would require a different skill sets, training, regulatory environment and mindsets than what is prevalent in the country today. With the world changing very fast, the question is: Can we run fast enough to keep up in step?

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